Daily Gold Update

Source: Marketwatch

San Francisco— Gold futures tumbled $16 an ounce Thursday as the dollar rallied on continued rate hike expectations and news of the death of Abu Musab al-Zarqawi, the leader of al-Qaida in Iraq, in a Baghdad air strike.

The announcement by Iraqi Prime Minister Nouri al-Maliki sent oil futures below $70 a barrel and sent the dollar higher. But the greenback really took off against the yen, following a steep decline in Asian markets overnight, and against the euro following less hawkish than expected comments from European Central Bank President Jean-Claude Trichet.

Gold for August delivery was last trading down $15.60 at $617 an ounce on the New York Mercantile Exchange after earlier touching $614.80, its lowest level since April 17.

Other metals fell sharply too. Silver was down 56 cents at $11.33 an ounce, platinum fell $34.50 to $1,197 an ounce, palladium fell $25.75 to $313 an ounce and copper was down 20.4 cents at $3.38 a pound.

Kevin Kerr, trader and editor of Global Resources Trader, a newsletter published by MarketWatch, said the market's initial reaction to the Zarqawi news may be short-lived.

The news "seems to have sent a message that oil production in Iraq may increase and that the death also somehow is good for the dollar," he said. "As we have seen in the past though, if anything the killing may lead to more attacks and even worse violence, having exactly the opposite effect."

Jordanian-born al-Zarqawi is alleged to be the instigator of much of the violence in the country, including suicide bombings, kidnappings and beheadings.

"I think the elation on the news this morning is short sighted and that it may only lead to another event similar to what we saw in London last July and in turn, could send the dollar reeling and gold back up toward $700," said Kerr.

Jon Nadler, investment products analyst at bullion dealers Kitco.com, agreed.

"The current gold sell-off is not only a possible misreading of future outcomes (arising out of this killing), but also a sign that traders (read funds) are focusing strictly on the news of the day and that "profit myopia" may have set in," he said.

From a technical perspective, gold is now close to critical support around a $610/613 spot price area, he said. If that level fails to hold, gold could move back under $600 and spend the summer trying to find its bearings.

"Gold will now have to rely on the retail investor and Asian physical buyers returning to the market with open pocketbooks," he said. "At the very least, the forecasts for "taking out those all-time highs" might have to be pushed back a few months…"

From Iran, President Mahmoud Ahmadinejad said he is ready to discuss "common concerns" regarding the country's nuclear program, although it will not negotiate what technology it's allowed to use, the BBC reported.

It was the president's first public comment since western governments presented Tehran with a package of incentives aimed at persuading it to stop nuclear research.

On Wednesday, Iran's top nuclear negotiator Ali Larijani said the package contained "positive steps" as well as "ambiguities."

Gold has fallen for the past three sessions since Federal Reserve Chairman Ben Bernanke's comments on inflation at a bank conference Monday revived fears in the market of further interest rate hikes.

His remarks have pushed the dollar higher for the past three sessions and upset stocks and commodity markets. Adding to the pressure, the European Central Bank, South Korea and India all raised interest rates today, while Turkey raised its benchmark rate on Wednesday.

On the supply side, gold inventories were down by 96 troy ounces at 7.79 million troy ounces as of late Wednesday, according to Nymex data.

Silver supplies were down by 290,361 troy ounces at 106.8 million troy ounces. Copper fell by 45 short tons to 9,026 short tons.

Indexes tracking the mining and metals sector fell sharply. The Philadelphia Gold and Silver Index was last down 5.5% at 125.16, the Amex Gold Bugs lost 5.8% to 291.17 and the CBOE Gold Index lost 6% to 125.26.